Jaguar Land Rover, one of Britain's biggest car manufacturers, is considering
building a major new engine plant in the UK which could create more than
1,000 jobs.

In a move that would be a major boost for the Government, the luxury car maker has drawn up the proposals as demand for its cars booms in Asia.

According to sources close to the company, Jaguar Land Rover has identified three areas to potentially base the plant – Wolverhampton, south Wales and a site in India which has not been named.

The board of the Indian car maker, Tata Motors, which owns Jaguar Land Rover (JLR), is understood to be discussing the viability of the engine plant and its location at present, with an announcement to be possibly made within the next month. Tata has already committed more than £1bn to the car maker since acquiring it from Ford in 2007 and a new plant would significantly add to that investment.

The UK is the most likely base for the plant, sources say, and if it is built it will "easily" employ at least 1,000 workers.

The move would be a significant boost to the British car industry which has seen a renaissance during the past 20 years after a period of decline in the 1970s and 1980s. The UK now produces 1.4m vehicles a year, an increase of 20pc compared with 2009, and builds more than 2m engines. More than three-quarters of the vehicles built in Britain are exported, with an annual export value of £5bn a year in the past five years, according to the Department for Business Innovation and Skills. JLR's engines are currently supplied by Ford from plants including Bridgend and Dagenham in the UK.

The contract was agreed following the American car maker's £1.15bn disposal of JLR. However, sales of Jaguar and Land Rover have accelerated rapidly since then, leading to a warning from the company last year of potential engine shortages. Sales for JLR are up 13pc in the first quarter of 2011, including a record-breaking March for Land Rover in the UK, and the company is on course to make an annual pre-tax profit of £1bn for the year to March 31. JLR is enjoying particular success in emerging markets, where its cars are seen as a status symbol for the growing middle class.

Carl-Peter Forster, the chief executive of Tata Motors, and Ralf Speth, the chief executive of JLR, are drawing up ambitious expansion plans for the brands. This involves a more sporty Jaguar and potentially producing 500,000 cars a year.

With this in mind, Tata is keen to take more control of the engine production of JLR.

The future of the agreement with Ford is not clear should the new factory be built, but the engine plant is initially expected to focus on new JLR vehicles. Details of the arrangement between JLR and Ford, whose Bridgend and Dagenham bases also produce engines for Ford-branded vehicles, have never been publicly disclosed but the deal is thought to be “ongoing”.

A spokesman for JLR said: “As a business we have an ambitious plan for growth and there are many matters related to that. But we have no comment beyond that.”

The Coalition will be keen to ensure that any new JLR plant is based in the UK. David Cameron, the Prime Minister, has constantly spoken of his desire to “re-balance” the economy away from financial services and, as one of the UK’s largest car manufacturers, JLR will play a key role in that.

The car maker employs 17,000 staff but is on a recruitment drive and also accounts for hundreds of thousands of jobs in the supply chain.

Last month it announced £2bn of supply contracts in the UK for the new Range Rover Evoque which will create approximately 5,000 new jobs. JLR is also a key investor in research and development, and accounts for almost 20pc of UK exports to China.

However, while the car maker is thriving, there are concerns that Britain’s manufacturing base is not big enough to compete with foreign rivals such as Germany.

Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, said: “Jaguar Land Rover are reaping the benefit of sustained investment in technology and product. Additional investment into the UK would be welcome and would send a strong signal about the Government’s efforts to rebalance the economy and to ensure manufacturing prospers.”